Business entities having an annual turnover or gross receipts of less than Rs. 1 crore need to be familiar with the special provisions of Section 44AD of the Income-tax Act in regard to computing profits and gains of business on presumptive basis. The major highlights of the ‘Presumptive Income Scheme’ are as under:

It applies to any ‘eligible taxpayer’ being an individual, HUF or partnership firm (not claiming any exemption or deduction in respect of special undertakings or incomes under the Section 10 or 80 family), who has income from ‘eligible business.’

An ‘eligible business’ means any business, other than business of a transport operator (since the same is covered under Section 44E), whose annual total turnover or gross receipts does not exceed Rs.1 crore.

While all kinds of businesses, including manufacturing, trading, etc. have been included, it needs to be borne in mind that business incomes in the nature of commission, brokerage and from agency business, as well as professional incomes derived by advocates, chartered accountants, doctors, engineers, architects, interior decorators, etc. would not fall within the scope of ‘eligible business income’ u/s. 44AD.

8% of the total turn over or gross receipts of the business or any higher sum, if so declared by the taxpayer, will be deemed to be the profits and gains of such business for tax purposes.

A taxpayer, who opts to declare his income under this Scheme, shall not be required to maintain any accounts or get the same audited under Sections 44AA or 44AB.

Any deductions allowable under the provisions of Sections 30 to 38, (such as depreciation u/s. 32, interest on borrowed capital u/s. 36 etc.) shall be deemed to have been given full effect to and no further deduction shall be allowed in this regard.

However, a partnership firm, which declares 8% or higher profits, will be eligible to claim deduction from such ‘deemed business income’, in respect of any interest or remuneration paid to its partners, in accordance with the provisions of Section 40(b).

In case of an individual or HUF running a proprietary business, while computing his total taxable income, the taxpayer will be entitled to claim any deduction under Sections 80C, 80D, 80G etc. in respect of specified investments and allocations.

IMMUNITIES & PRIVILEGES

By the very nature of this Scheme, the deemed business income shall effectively be accepted as such and the taxpayer will not be required to face any agony under scrutiny assessment proceedings in relation to facing probing inquiries on business, rejection of accounts, estimation of higher income or additions in the form of disallowance of business expenditure. These immunities are infact, the star attractions of opting for the Scheme.

Moreover, Section 44AD grants the special privilege of not being required to pay any advance tax in respect of the deemed income from the eligible business. Income-tax on such income can be paid on self assessment while filing the Return of Income. Thus, the taxpayer would enjoy immunity from payment of any interest u/s.234B or 234C.

CBDT has announced a simple 3 page IT Return ‘Sugam’ (ITR-4S) for all individuals and HUFs, subject to specified conditions. Income of partnerships governed by Section 44AD can be declared under the regular tax return ITR-5.

It should, however, be borne in mind that a taxpayer declaring his income under this Scheme can still be called upon to explain the borrowings or investments in his case. If the same are not satisfactorily explained, he may be required to face additions on account of unexplained cash credits etc. under the provisions of Section 68 to 69C of the Income-tax Act.

MANDATORY AUDIT FOR LOWER PROFITS

If a taxpayer governed by the provisions of this Scheme claims that his business income is lower than 8% of his turnover or receipts, he will not only be required to maintain his books of accounts as prescribed u/s. 44AA, but also get the same compulsorily audited u/s. 44AB.

However, a useful exception from the rule for mandatory audit has been made for a case where the concerned taxpayer’s total income does not exceed the basic exemption limit or maximum amount not chargeable to tax, as prescribed in his case.